Cross Border Restructuring In Hong Kong Aided By Common Law Judicial Assistance To Foreign Liquidators.

 

11 January, 2018

 

 

Z-Obee Holdings Limited (provisional liquidators appointed) – HCMP 1563 of 2017 (date of judgment 31 October 2017) This is the first Hong Kong decision where a foreign scheme of arrangement was sanctioned by the Hong Kong Court following a letter of request from a foreign Court.

 

Background

 

Z-Obee Holdings Limited (the “Company”) is a company incorporated in Bermuda and registered as a Hong Kong overseas company, with its principal business being the distribution and marketing of mobile handsets. The Company’s shares were listed on the Stock Exchanges of Hong Kong and Singapore. In 2013, the Company’s listing in Singapore was converted to a secondary listing, with Hong Kong becoming the primary listing.

 

The Company ran into financial difficulties in 2014 resulting in winding up petitions being presented in Hong Kong by creditors against the Company and one of its principal subsidiaries, Max Sunny Limited (“Max Sunny”). The parties then entered into a compromise for the debts due to be paid by instalments. Following execution of a settlement deed, the winding up petitions and summonses for the appointment of provisional liquidators were adjourned on the basis that the hearing would be restored if the agreement was breached.

 

When the Company and Max Sunny failed to pay the third instalment, the summonses for appointment of the provisional liquidators were restored and provisional liquidators were appointed by the Court.

 

The Company and its creditors thereafter consensually wished to pursue a restructuring rather than a liquidation. But in the case of Re Legend Resorts International Limited [2006] 3 HKC 565, the Court of Appeal held that the appointment of provisional liquidators over an insolvent company solely for the purpose of implementing a restructuring was not permitted under Hong Kong’s statutory insolvency regime (dating back to the 1950s). 

 

To sidestep this statutory limitation, the Company’s board successfully applied for the same provisional liquidators to be appointed in Bermuda where provisional liquidation is allowed for restructuring purposes.

 

Thereafter by letter of request the provisional liquidators (appointed in Bermuda) sought recognition and assistance from the Hong Kong Court under the common law1. The Hong Kong Court approved their application and at the same time discharged their appointment as Hong Kong provisional liquidators.

 

The proposed scheme was straightforward. It compromised the unsecured debts of the Company of which a significant part were governed by Hong Kong law and all scheme creditors voted in favour of the debt compromised.

 

Who should present the petition?

 

This was an important question clarified by the decision. Section 673 of the Companies Ordinance (Cap 622) provides that:

 

“(2) The Court may, on application made for the purposes of this subsection, sanction the arrangement or compromise.

 

(3) Subject to subsection (4), an application for the purposes of subsection (2) may be made only by—

 

(a) in the case of an arrangement or compromise proposed to be entered into with the creditors of a company, the company or any of the creditors;….

 

(4) If the company is being wound up, an application for the purposes of subsection (2) may be made only by the liquidator or provisional liquidator.”

 

It was suggested by the counsel acting for the petitioners that section 673(4) could be read as applicable to the winding up petition in Bermuda and the provisional liquidators appointed in that jurisdiction.

 

Harris J however clarified that section 673(4) applies once a winding up order has been made by the Hong Kong Court and therefore the “provisional liquidators” in that section is a reference only to provisional liquidators appointed by the Hong Kong Court. The Court confirmed that section 673(3) was applicable in the present case, i.e. the application was being made by the company. 

 

Sufficient connection with Hong Kong

 

Harris J concluded that there was sufficient connection between Hong Kong and the scheme to justify the Hong Kong Court to exercise its jurisdiction to sanction the scheme because:  

 

• A substantial proportion of the debt was governed by Hong Kong law.  The Gibbs Rule2, which establishes that a debt can only be compromised under the law of governing the debt, is followed in Hong Kong; and
• The Company was listed in Hong Kong and there was a desire to protect its local listing status.

 

The scheme was sanctioned by the Court in Hong Kong.  A similar scheme was sanctioned by the Bermuda Court that same day. 

 

Takeaway point

 

Through the use of common law judicial assistance to foreign liquidators, this case shows how innovative solutions can get around the shortcomings of Hong Kong’s statutory insolvency regime.  We now expect to see more cases where foreign schemes are sanctioned by the Hong Kong Court.

 

1 As recognised in Hong Kong in the case of Joint Official Liquidators of A Co v B & C [2014] 5 HKC 152.

2 Antony Gibbs & Sons v La Societe Industrielle et Commerciale des Metaux [1890] 25 QBD 399